How to Keep More of What You Earn Under the New Tax Law
The Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017, represents the most significant changes in tax law in more than 30 years. Whether or not you’re a fan of the new legislation, it’s important to understand how it affects you and what you can do to minimize your taxes under the new law.
Changing Brackets and the End of the Marriage Penalty
The new law keeps seven tax brackets, but, at most income levels, the rates are lower than they were previously. One particular effect of the changing tax brackets is that the “marriage penalty” that has affected some married couples in the past may be reduced or eliminated in some cases.
The Increase in the Standard Deduction
The standard deduction is nearly doubling for all filing statuses, which means that fewer taxpayers will benefit from itemizing deductions such as charitable contributions, mortgage interest, etc. The standard deduction for single filers is $12,000 for 2018, while the standard deduction for married filing jointly filers is $24,000 for 2018.
The State and Local Taxes Deduction
This is a big one. In the past, taxpayers have been able to deduct income taxes paid to states, as well as property taxes, on their federal tax returns. While the new law does not eliminate these deductions, the law limits the deduction to a combined $10,000 for income taxes and property taxes. For taxpayers in high tax states, this limitation has the potential to increase your tax bill.
In 2017, you can deduct medical expenses to the extent that they exceed 10% of your adjusted gross income. Beginning in 2018, you can deduct medical expenses to the extent they exceed 7.5% of your adjusted gross income. It will rise to 10% in 2020.
Mortgage Interest Deduction
In 2017, you can deduct mortgage interest on loan balances of up to $1 million. Beginning in 2018, the amount decreases; you can only deduct mortgage interest on loan balances of up to $750,000.
Other Disappearing Deductions
Some deductions did not survive, including the following:
- Moving expenses
- Unreimbursed employee expenses
- Casualty and theft losses
- Employer-subsidized transportation reimbursement
Child Tax Credit
The child tax credit is doubling from $1,000 per qualifying child to $2,000 per qualifying child. A credit is much more valuable than a deduction because it is a dollar-for-dollar reduction of your tax liability, while a deduction simply reduces the income on which you pay tax.
Contributions to 529 plans can now be used to pay up to $10,000 per year of K-12 education, while in the past they have only been used for post-secondary education expenses. The earnings in these plans are also tax-free if they are used to pay for tuition for kindergarten through college. The contributions are not deductible on your federal tax return, but most states allow the deduction.
While this article highlights several areas of the new tax bill that may affect you personally, there are many more that may be relevant. This legislation represents the most sweeping modifications to the U.S. tax code since 1986. While these changes take effect for the 2018 tax year (not 2017), now may be a good time to engage professional help specific to your personal or business taxes so that you’re prepared for the 2018 changes.
Special Thanks to Gary Milkwick and Legal Zoom for “Content Share”